2003

In this paper we introduce the notion of a linked domain and prove that a non manipulable social choice function defined on such a domain must be dictatorial. This result not only generalizes the Gibbard-Satterthwaite Theorem but also demonstrates that the equivalence between dictatorship and non-manipulability is far more robust than suggested by that theorem. We provide an application of this result in a particular model of voting. We also provide a necessary condition for a domain to be dictatorial and characterize dictatorial domains in the case the number of alternatives is three.

In this paper we consider testing that an economic time series follows a martingale difference process. The martingale difference hypothesis has typically been tested using information contained in the second moments of a process, that is, using test statistics based on the sample autocovariances or periodograms. Tests based on these statistics are inconsistent since they cannot detect nonlinear alternatives. In this paper we consider tests that detect linear and nonlinear alternatives. Given that the asymptotic distributions of the considered tests statistics depend on the data generating process, we propose to implement the tests using a modified wild bootstrap procedure. The paper theoretically justifies the proposed tests and examines their finite sample behavior by means of Monte Carlo experime.

We examine how the possibility of a bank run affects the investment decisions made by a competitive bank. Cooper and Ross (1998) have shown that when the probability of a run is small, the bank will offer a contract that admits a bank-run equilibrium. We show that, in this case, the bank will choose to hold an amount of liquid reserves exactly equal to what withdrawal demand will be if a run does not occur; precautionary or "excess" liquidity will not be held. This result allows us to show that when the cost of liquidating investment early is high, an increase in the probability of a run will lead the bank to invest less. However, when liquidation costs are moderate, the level of investment is increasing in the probability of a run.

4. Haber, S., N. Maurer., and A. Razo, "When the Law Does Not Matter: The Rise and Decline of the Mexican Oil Industry,"Journal of Economic History, 63 (2003): 1-32.

Abstract:

Changes in formal institutions do not always affect economic outcomes. When an industry has specific technological features that limit a government's ability to expropriate it, or when the industry is able to call on foreign governments to enforce its de facto property rights, economic agents can easily mitigate changes in formal institutions designed to reduce these property rights. We explore the Mexican oil industry from 1911 to 1929 and demonstrate that informal rather than formal institutions were key, permitting oil companies to coordinate their responses to increases in taxes or the redefinition of their de jure porperty rights.

This paper considers consistent testing the null hypothesis that the conditional mean of an economic time series is linear in past values. Two specific tests are discussed: the Cramer-von Mises and the Kolmogorov-Smirnov. The particular feature of the proposed tests is that the bootstrap is employed to estimate the non-standard asymptotic distributions of the considered test statistics. The tests are justified theoretically by asymptotics and their finite sample behaviors are studied by means of Monte Carlo experiments. The tests are applied to five US monthly series and evidence of nonlinearity is found for the first difference of the logarithm of the personal income and for the first difference of the unemployment rate. No evidence of nonlinearity is found for the first difference of the logarithm of the US dolar/ Japanese Yen exchange rate, for the first difference of the three month T-bill interest rate and for the first difference of the logarithm of the M2 money stock. Contrary to typically employed tests, our testing procedures are robust to the presence of conditional eteroskedasticity. This may explain the results for the exchange rate and the interest rate.

This paper considers the welfare implications of transfers to poor families that are conditional on school attendance and other forms of investment on their children's human capital. Family decisions are assumed to be the result of (generalized) Nash bargaining between the two parents. We show that, as long as bequests are zero, conditional transfers are better for children than unconditional transfers, provided that the total amount transferred to the family is the same under the two transfer programs. The mother's welfare (or rather, the welfare of the parent that cares relatively more for the children) may also be improved by conditional transfers. Thus, conditioning transfers to bequest-constrained families have potentially important and desirable intergenerational and intra-generational welfare effects. Conditioning transfers to families leaving positive bequests makes every family member worse off.

This paper develops a Real Business Cycle model characterized by idiosyncratic employment shocks and quantitatively explores the behavior of aggregate variables under the assumptions of complete and incomplete insurance markets. The results show that the model with incomplete markets produces standard deviations and correlations of aggregate labor input and labor productivity close to the ones of the U.S. economy for the post-war period.

In this paper, I explain two "puzzles" which have been observed in firm level data. (1) Firms which display a high sensitivity of investment to cash flow (commonly believed to be an indicator of liquidity constraints) usually have large unutilized lines of credit which, presumably, could be used to overcome the shortage of funds. (2) Firms which are perceived to be extremely liquidity constrained actually show very little sensitivity of investment to cash flow. I use a dynamic model of firm investment with liquidity constraints and non convex costs of adjustment of capital which can explain these facts. The fixed cost of adjustment in the presence of liquidity constraints implies that firms need to have a certain threshold level of financial resources before they can afford to invest and incur these costs. Below this level, investment will not be sensitive to increases in cash flow. Once they cross this threshold, firms' investment will be positively correlated with their financial resources until they reach their desired level of capital stock. However, even if investment is sensitive to cash flow, firms always borrow below their credit limit to guard against future bankruptcy or binding liquidity constraints. I show therefore, that a firm which displays investment cash-flow sensitivity is certainly liquidity constrained. However, the reverse is not necessarily true.

We use Mexican firm-level data to study the role of currency mismatches in the corporate sector in exacerbating the negative effects of a devaluation. We also investigate what drives Mexican firms to borrow in foreign currency. We find that holding dollar denominated debt in a devaluation adversely affects firms' earnings and investment. However exporters invested more than non exporters in the same period. We also find that the negative effect of dollar debt was stronger than the positive effect of exports in the 1994 crisis for firms with positive dollar debt and/or exports, relative to firms that did not borrow abroad and/or export. This was a result of imperfect currency matching by firms. However, in the 1998 crisis firms managed the denominations of their inflows and outflows much better and these two effects were roughly equal in magnitude. We also find some evidence of currency matching by exporters, especially after the introduction of the floating exchange rate.

In this paper we characterize and estimate the degree to which liquidity constraints affect real activity. We set up a dynamic model of firm investment and debt in which liquidity constraints enter explicitly into the firm's maximization problem, so that investment depends positively on the firm's financial position. The optimal policy rules are incorporated into a maximum likelihood procedure to estimate the structural parameters of the model. We identify liquidity constraints from the dynamics of a firm's evolution, as formalized by the dynamic estimation process, and find that they significantly affect investment decisions of firms. Firms ability to raise equity is about 73\% of what it would have been under free capital markets. If firms can finance investment by issuing fresh equity, rather than with internal funds or debt, average capital stock is about 6\% higher over a period of 20 years. Transitory interest rate shocks have a sustained impact on capital accumulation, which lasts for several periods.Keywords: Investment, liquidity constraints, estimation of dynamic structural models, financial accelerator. JEL Classification: C51, E22, E32, E5, G31.